A thought provoking paper from the European Banking Institute explores the potential for tokenized collateralized loan obligations (CLOs). Or more specifically, the risks of these asset backed securities (ABS) and how legislation might address them. It doesn’t just look at the risks to investors but also the potential systemic risks given securitizations triggered the Great Financial Crisis (GFC). While opacity was a big issue during the GFC, we analyze why that should no longer be so.
Many of the perils of the CLOs have nothing to do with blockchain. For example, it’s well known there’s a moral hazard in securitizing loans. That’s because the loan originator sells on the loans, so it is not exposed to payment delinquency. Hence, they may be motivated to lend to riskier borrowers.
The paper notes, “More and more institutional investors, like insurance companies, are investing in CLOs which are rated with high credit ratings, although their underlying loans may not be of the same quality.”
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